ESOP Advisor Hall of Fame Interview - Rob Brown

Please tell us a little bit about the history of your career.

Rob Brown: I graduated from Law School in 1970 and began with what is now the largest law firm presence in Rochester, New York. That was three years before ERISA. I was a rookie, and I was asked to follow the developing legislation because, of course, nobody else wanted to do it.

At that time, employee benefit plans were handled in either the tax department or the labor department in large firms. Specialization had yet to evolve to the point where there was an employee benefits department let alone an ESOP department. ERISA has changed all that.

Prior to the passage of ERISA, the firm I was with had some partially employee-owned corporate clients because ESOPs existed before they were codified in their present form. One of the companies I dealt with would contribute shares each year, take a deduction for the shares, and then buy the shares back. You can't do that legally anymore, but pre-ERISA there weren't a lot of the rules that we have today.

Before ERISA, professionals found a lot of their specific guidance about employee pension benefits in the speeches of Isidore Goodman, then Chief of the Pension Trust Branch of the IRS. For some time, the subscriptions to the old, black Commerce Clearing House indices to Pension Law came with paper-bound volumes of Goodman’s speeches. Isidore Goodman was a major force in protecting employees’ pension benefits before ERISA, and his speeches were considered excellent guidance about the law.

For a long time, employee pensions were considered at-will benefits that could be revoked by employers, and there were instances where individuals who had worked in for an employer for 20 years or more attained retirement age and subsequently lost their pension. ERISA changed that in a dramatic way, and employees’ rights are now much better protected.

In 1974, five friends and I started our own law firm. I headed up our tax practice and inherited the pension benefit area. In 1983, we hired a young lawyer for our tax practice who was intrigued with the idea of ESOPs, and he began to develop the field. That was my introduction to ESOPs. In 1999, that lawyer left our firm to join his family’s business, and I took over all the ESOP practice.

In 2011, three other experienced ESOP lawyers, and I formed a firm that practiced only in the ESOP and non-qualified executive compensation areas.

In May of this year, I went to work with Stevens and Lee, a large general practice firm with a sophisticated national ESOP planning and implementation practice.

That’s a nutshell view of 53 years of practice of which about 40 have been in the ESOP arena.

Have you gotten any recognitions or awards because of your work in ESOPs?

Rob Brown: I have many of the usual funky marketing awards like Best Lawyers and all that stuff, but the only one that has any significance to me is that in 2009, I was sponsored to and elected as a fellow of the American College of Employee Benefits Council. It's an accomplished group of people, and I'm humbled to have been elected to it. In 2000, Isidore Goodman had been elected posthumously as an In Memoriam Fellow for the College.

What individuals have most helped or influenced your career along the way?

Rob Brown: There are two lawyers, Peter Faber and Bill Colby, who were spectacular mentors for me. Both were partners in the first firm for which I worked. Bill has passed on, but Peter is still alive and is Senior Counsel in the tax practice at McDermott Will & Emery in New York. They were very accomplished tax lawyers. Peter has an encyclopaedic understanding of the tax law and saw everything in the light of the Internal Revenue Code, its rules, regulations and its history. Bill came at it from the standpoint of first understanding the industry that was being taxed and then understanding the tax law. So, between them, I developed a very broad range perspective on the law grounded in the practicalities and the realities of the economic context and substance. For me, that is probably the most enlightening experience I have had in the practice of law.

Another individual who had a lot of influence on me was Jerry Kaplan, who has now passed but was also at McDermott as a renowned ESOP practitioner. I remember being in the middle of a transaction with another very good ESOP lawyer. She and I had a disagreement about whether we could do something in an uncertain area of the law. We both had a lot of respect for Jerry. We agreed that we would call Jerry together about the issue and would abide by whatever he said.

We explained the thing to Jerry, and he said, “Let me get this straight. The trustee wants to do it. The company wants to do it. The selling shareholder wants to do it.” And we said, “Yeah, that's true.” And he said, “We'd be pretty crummy lawyers if we couldn't figure out a way to do it when they all want to do it.” It was such an injection of common sense into the situation that it has stuck with me to this day.

In fact, I have learned from everybody I've ever dealt with, including the associates that I’ve hired right out of law school, The congregation of people who've influenced me in a positive way is too large to mention many people specifically, but the three folks I mentioned stand out.

Have any of your ESOPs then unique or different?

Rob Brown: They all are unique and different. I mean, every single one. They're always idiosyncratic. I was speaking with a person this morning who's not sure whether he wants to do an ESOP. I spoke with him and his two minority owners. I said to him that the flexibility of ESOPs means that they're also very complex because flexibility and complexity live in the same bedroom. And anytime you have a lot of options, there's a lot of complexity. I think that our job is to make sure that we explore the client's desires in such a way that we can maximize the flexibility and minimize the complexity of any given transaction. That's what makes them all unique. Individual owners have very different goals and desires, and their objectives need to be recognized in their transactions.

Are there any ESOP transaction war stories that were challenging that you could share?

Rob Brown: The most challenging thing, I think, in the modern context is how to use ESOPs in the context of the consolidation of businesses that is occurring today. Private equity groups are behind consolidation in a lot of industries and professions. Private equity is an appealing concept to sellers because the original shareholders can get bought out handsomely and have a second bite at the apple. But this kind of transaction is, in some ways, the antithesis of an ESOP transaction because ESOPs represent the democratization of capitalism. Private equity represents the concentration of capital, and one of the big threats to our nation’s political stability is the concentration of wealth and income.

I think it's an interesting challenge to figure out how to extend employee ownership in a way that continues to democratize the benefits of capitalism.

Capitalism is a very powerful tool. It's probably the most powerful tool we've ever invented for the creation of wealth, but it leaves unanswered the question of the appropriate distribution of wealth. That, of course, is an intensely volatile political question.

I think that when you're talking about managing a successful, stable capitalist economy promoting the democratization of wealth is one of the big and interesting challenges. We are addressing that challenge continuously in the ESOP world.

The lack of clear regulations for ESOPs is a serious problem. ESOPs were rudimentary back in the day. Regulation has gotten more extensive as ESOPs have become more complex, but both the IRS and the Department of Labor have failed to provide specific, thoughtful formal guidance.

The Employee Benefits Security Administration (EBSA), the division of the Department of Labor responsible for protecting participants in ESOPS and other employee benefit plans has gone about guidance by bringing litigation, but cases that go to litigation are not representative. They're polar. The represent the extreme situation. There is very little guidance for day-to-day common-sense questions and answers. Far more subtle guidance is desperately needed, because the consequences of making a wrong decision, innocent or not, can be very costly.

It is possible to provide good, thoughtful guidance in complex areas. Treasury Department Guidance is prolific in other areas of US tax law. It covers almost every aspect of taxation in an extraordinarily complex global economy. That's not true under the sections of the Internal Revenue Code that govern qualified plans.

The Department of Labor is even worse in providing guidance for employee pension benefit plans, particularly ESOPs, under ERISA. They haven't yet come out with fair market value regulations that Congress has demanded that they produce, and they just don't produce guidance at all in other areas.

In defence of the agencies, their failure is in part because Congress has underfunded the effort. So, neither the Treasury Department nor the Department of Labor can hire enough people of the required talent and experience to produce the level of guidance that's necessary. It’s a real problem. The world of ESOPs has gotten more complex as more and more uses for the tool are discovered, but the guidance has lagged way behind and that makes working in the area very difficult for professionals and for clients.

What are your thoughts about the future of ESOPs?

Rob Brown: Exit planning, including exit planning with ESOPs is demographically driven. So, you must look at the number of people in each demographic group to study business succession trends. There are still a lot of Baby Boomer business owners, even with natural attrition. These people were born between 1946 and 1964. Someone born in 1964 is 60 years old right now. Entrepreneurs tend to work longer than other retirees. So, whereas a normal retiree may work till age 65 or 70, entrepreneurs hang on for perhaps 10 years longer. This will translate into relatively robust opportunities to use ESOPs as a succession planning tool for the next 10 to 15 years.

When business succession by Boomers trails off, I think you will see other uses for ESOPs such as ESOP holding companies as alternatives or complements to private equity consolidations. Democratization of wealth though work is a concept that is attractive to almost all political perspectives, so ESOPs as tools for broad-based ownership are likely to remain popular.

Can you share a story of how you helped a client achieve a moment of understanding what an ESOP could do for them?

Rob Brown: I think that question is looking backwards through the telescope because you can spot an ESOP prospect relatively easily. People who are receptive to ESOPs are business owners who:

• Want to stay involved with their businesses,

• Want to maintain the legacy of their business,

• Believe that their employees deserve some reward for helping them achieve their goals

• Are willing to accept fair market value rather than the highest strategic price to achieve their other goals.

So, what you need to do is sort of prequalify people that you're talking to about ESOPs. I don't view my job as selling ESOPs. My job is to implement ESOPs for people for whom it makes the most sense for the implementation of their personal, business, family and financial goals.

So, what makes it successful ESOP?

Rob Brown: It’s the ability to educate the workforce about what it means to be an owner. In the United States of America very few people are owners of anything other than their cars and their houses. If they have other assets, they might have a rental property here and there. Or they might have stocks, but their stocks are usually going to be in 401(k) plans, and most of those are invested in funds of one kind or another. You can switch your assets among the fund, but you're not making real investment decisions. People, in general, have no concept of what ownership of a business means.

I think you must bring people along to understand both the benefits and the obligations of ownership. The companies that do that most successfully are the most successful ESOP companies. Those are companies that Professor Joe Blasi of Rutgers University writes about that have high profit margins and produce steady streams of solid EBITDA. They even have a reduced number of lost time accidents. Why? Because the employees have inculcated into themselves a real understanding of the burdens and benefits of ownership.

Why do you enjoy working with ESOPs?

I love dealing with people, solving their problems, and taking the stress off somebody who doesn't know what they're going to do with their wealth.

Owners attracted to ESOPs are unique. They're not necessarily interested in top dollar. They're interested in peace of mind, and they have a very broad concept of success. Helping them achieve their goals requires a professional to be very much more than simply a tax or financial advisor.

The ESOP industry is mission driven. The whole concept is one of democratizing capitalism. There really isn't any other vehicle that moves the fruits of capitalism so effectively to workers while preserving the dignity of their labor.